June 1, 2009 / 2:38 PM / 11 years ago

UPDATE 4-Dow gets shake-up as GM, Citi kicked out of average

(Updates with more context on the housing crisis and GM )

By Leah Schnurr

NEW YORK, June 1 (Reuters) - General Motors and Citigroup were kicked out of the closely watched Dow Jones industrial average on Monday, marking a historic fall from grace for two once venerable American corporations.

In a widely anticipated move, Dow Jones & Co said technology bellwether Cisco Systems Inc (CSCO.O) will replace GM, which filed for bankruptcy on Monday morning. Travelers Co (TRV.N), a large home, auto and commercial insurer, will take the place of Citigroup due to the bank’s restructuring and the government’s “large and ongoing stake.”

The changes marked the latest fallout on the financial landscape from the collapse of the U.S. housing market, when home prices plunged after years of running higher as credit markets froze. The turmoil helped drive Lehman Brothers into bankruptcy last September, shaking Wall Street to its core and prompting the U.S. government to create a $700 billion financial rescue fund. The U.S. Treasury plans to use about $30 billion of that bailout money to buy a stake in GM.

GM’s bankruptcy is the third-largest Chapter 11 case in U.S. history, ranking only behind Lehman Brothers and WorldCom in terms of size.

One factor that helped seal GM’s fate was the surge in U.S. oil futures prices to record highs near $150 a barrel last July. That drove gasoline prices up to around $4 a gallon and helped kill demand for Detroit’s gas-guzzling best sellers, the sport utility vehicles, or SUVs.

GM’s removal from the Dow ended its 83-year run in the blue-chip industrial average, which has just 30 components. The only other stock with a longer history is General Electric (GE.N), which was in the original Dow in 1896.

“We thought it was a fitting replacement for General Motors because Cisco with its products is really the pavement on the information highway and it’s helping shape the 21st century much the same way automobiles shaped American culture in the 20th century,” said John Prestbo, editor and executive director of Dow Jones Indexes.

Cisco, whose routers and other network gear form the backbone of technology networks, was founded in 1984. Its inclusion illustrates a shift in the economy at a time when 100-year-old GM is entering what is hoped to be a fast-track bankruptcy. For details, see [ID:nN01398575].

Cisco becomes the fifth technology company included in the Dow, increasing the sector’s influence on the index.

Prestbo said the addition of Travelers offset the decreased presence of financial stocks following American International Group’s (AIG.N) removal last fall after the insurer was bailed out by the government.

Shares of Cisco gained 5.4 percent to $19.50, while Travelers was up 3.1 percent at $41.91.

GM ALSO GETS THE BOOT FROM S&P

After Monday’s closing bell, Standard & Poor’s said GM will be removed from the S&P 500 following the end of Tuesday’s trading.

In the Dow industrials, the financial sector remains a little underweight after it was eviscerated by the financial crisis fallout. That is putting more prominence on energy companies Chevron (CVX.N) and Exxon Mobil (XOM.N).

With the reshuffle, Chevron will have a weighting of 5.9 percent in the Dow and Exxon will have a 6.2 percent weighting, according to Birinyi Associates. International Business Machines Corp (IBM.N) will remain the biggest component with a Dow weighting of 9.5 percent.

Dow Jones & Co said the changes will be effective as of the start of trading on Monday, June 8.

The suspension of GM’s stock from the New York Stock Exchange begins on Tuesday, when it is expected to start trading on the Pink Sheets under a new ticker symbol, according to an analyst at Pink OTC Markets Inc.

The last company to be kicked out of the Dow due to bankruptcy was Manville Corp, which was replaced 27 years ago by American Express (AXP.N). Manville made asbestos products and was sued by ill workers and families.

While it remains a household name, the Dow has lost some influence with institutional investors who are turning increasingly to the broad S&P 500 as the fallout of the economic crisis has hammered stocks, said Jeff Kleintop, chief market strategist at LPL Financial in Boston

“It is a little bit more a Main Street gauge. Certainly as you’re walking through an airport or glancing at the cover of any newspaper, the Dow is going to be on there,” Kleintop said.

The Dow is a price-weighted index, meaning its direction is dependent on the stock prices of each of its components, while the S&P 500 is weighted by market cap, or what a company is worth.

Nonetheless, being included in the Dow carries a certain cache. The Dow average is intended to reflect the most stable companies across the U.S. economy. (Additional reporting by Chuck Mikolajczak; Editing by Jan Paschal)

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